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SolveYourProblem Article Series: Accounting
Home & Small Business Accounting

    

     

Keeping Track Of Cash:
Special Accounting Controls

 

The most liquid asset within any organization is cash. Because cash is easily transferable, it is the asset most susceptible to improper diversion and use by employees. Since there are numerous transactions that either directly or indirectly affect the receipt of cash and its payment, it is essential that cash be effectively safeguarded through the development and use of special controls.

Within most organizations there is usually no significant amounts of cash available. Any cash received is immediately or within a reasonable amount of time deposited in a bank account. Any payments made by the organization are done by check. Most businesses deposit all cash receipts in a checking account at a convenient commercial bank and make all payments by check drawn against that bank. The forms used by the depositor in working with the commercial bank are signature cards, deposit slips, checks, and bank statements.

When a checking account is first opened by a business concern, certain employees are given the responsibility of signing the checks that will be drawn on the business's checking account. The authority to sign the checks is given by the signature appearing on the “signature card”. This puts the bank on notice that the signatories on the signature card are authorized to sign the check for the concern. Usually the organization will require that the signature on the check be a two-party signature. There may be numerous individuals who are authorized to sign the checks; however, there must at all times be two signatures on the check in order for it to be valid. The two-party check acts to reduce the possibility of misappropriation of funds, and also makes more than one individual aware of where funds are being spent.

In order for an organization to write checks on an account, there must be funds within the account to cover the checks written. In order to accomplish this, a “deposit slit” or “deposit ticket” must be prepared. The deposit slip, which is usually prepared in duplicate, has a space for writing the amount of currency and coin being deposited as well as for listing the checks being deposited. The deposit slip will have a place to write in the checking account number on the slip, or if the deposit slip is preprinted, it will already contain the account number and the name of the business organization on the face of the form.

Once the checking account has been set up and there exists funds in the account, it is possible to make cash payments by writing checks on the account. A check by definition is said to take the place of cash. The “check” is a written instrument that orders the bank it is written on to pay a specific sum of money to the party designated on the face of the check. There are three parties to a check; the bank on which the check is drawn, known as the drawee; the person to whom the check is being paid to (pay to the order of), the payee; and the person who signs the check, the drawer or payor.

The check, or more specifically, the check stub or duplicate copy of the check, becomes the basis for the journal entry made in the cash payments journal. While the form of the individual checks issued by different banks may vary, basically the following information is found on the typical check: the name and address of the depositor; serial numbering in order to facilitate the depositor's internal control; a preprinted account number; and the name of the bank on which the check is written.

The records maintained by the business organization having the checking account are usually found in the checkbook, which contains the unwritten checks and the check stubs. The bank maintains a separate record of the activity within an individual checking account, and forwards to the checking account customer a bank statement, usually on a monthly basis. The bank statement reflects the record that the bank maintains of activities affecting the customer's checking account for the month. Like any account that is maintained for a customer or a creditor, certain specific information is found in the bank statement. This account is treated by the bank as if the customer is actually a creditor, because the funds being safeguarded for the checking account customer, as far as the bank is concerned, represents a liability to the bank.

The bank statement contains the opening balance in the customer's account. Any increases to the account as a result of deposits are listed on the bank statement and are known as credits. Any checks the customer has written and the bank has paid during the month are shown as reductions on the bank statement, and thus are recorded as debits to the bank statement.

Any charges that the bank has made, such as monthly service charges, appear on the bank statement and are shown as reductions from the balance in the account. When the bank has been asked to pay obligations for the customer, these payments are shown as debits to the account. Where the bank has acted as a collection agent for the customer, these collections appear as credits on the bank statement. The final line on the bank statement represents the ending balance in the statement. This balance should agree with the balance on the check stub for the same date.

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SolveYourProblem.com : 2007

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